The Merits of Patriotic Investing

With July 4th upon us, the United States is engulfed by a patriotic fervour symbolized by ritualistic sky-burning and good ol' hot dogs. Although this outward expression of nationalistic delight is reserved for special days like the 4th of July, Memorial Day, and Veteran's Day, a similar prideful phenomenon occurs every day in all the various equity markets around the world.

One of the first concepts that I learned about in finance was the idea of the domestic or "home bias." As Investopedia defines it, it is "the tendency for investors to invest in a large amount of domestic equities, despite the purported benefits of diversifying into foreign equities." This is often attributed to barriers such as legal restrictions and greater transaction costs but also irrational considerations such as personal preference. Although this effect has been somewhat reduced by the emergence of the BRIC countries (Brazil, Russia, India, and China) and the opening of their equity markets, it is still widely accepted that the home bias is still in effect and is viewed as a predominantly negative occurrence.

Although I feel that the home bias can be potentially negative if taken to the extreme, I much more strongly believe that the bias is mainly rational and generally positive. It's established that the more information the investor possesses the more empowered his decisions will be. Information comes from familiarity and familiarity often comes from what is near us. This is definitely true in real estate but is also generally true for equity investment as well. Because of this, I feel that the home bias is necessary to ensure fully-functioning markets. I also believe that for an investor to have a competitive advantage, complete awareness of his investments is necessary. This awareness often stems from knowing the market: the terrain, the customers, the suppliers, the competitors, etc.

So for now, until the world comes together a bit more and information is shared more transparently -- patriotic investing is as good as apple pie.